The success of Tesla at selling zero-emissions electric vehicles has the state of California pondering whether it should raise the fraction of cars that must be zero-emission vehicles (ZEVs) in the future. It sounds good, but for Tesla it’s bad, because the move could limit or devalue the emissions credits that Tesla so profitably sells. It has other automakers irked, too.

California lawmakers would like to like to see all cars be zero-emissions (eventually). The current rule is that automakers must be on a path to have 15.4% of new vehicle sales in California be ZEVs. Tesla blew by that standard with the first Tesla Roadster it sold in 2008, since its fleet is 100% electric. The company sells emissions credits to other automakers (it’s allowed, and common practice) but there’s a glut of ZEVs coming and an excess of emissions credits available.

Credits let other automakers sell fewer ZEVs
There are so many emissions credits floating around in California, automakers shy on ZEVs can get by producing just 6% electric vehicles or fuel cell vehicles (which also count as ZEVs). That’s from a Bloomberg News story quoting Dan Sperling, a University of California at Davis professor of civil engineering and environmental science, who sits on the powerful California Air Resources Board (CARB). To get other automakers to raise the number of zero-emissions cars they actually build, Sperling says CARB may be inclined “to make the mandate tougher.”

The number of models of battery electric vehicles (BEVs), plug-in hybrids (such as Chevrolet Volt), and hybrids (such as Toyota Prius) available will almost double by 2018 to nearly 100 models. The sale of hybrids has been soft this year in the wake of low gasoline prices, currently averaging $2.25 a gallon.

Emissions credit trading is an established tradition outside the auto industry. Polluting factories in the Midwest can buy credits from more distant, cleaner factories elsewhere, and on average US air quality improves. But that’s less consolation to nearby neighbors of the polluting factories who have to deal with acid rain. In a similar vein, in New York City, owners of short buildings such as churches, museums, or old-time clubs can sell air rights so that in a block zoned for nothing taller than, say, 10 stories, you can have a legal 40-story building.

California sets own emissions rules

Because California’s skies were so dirty a generation ago, the EPA has long allowed California to set its own, more stringent standards for cars and other polluters: ships running on dirty bunker crude fuel docked at Long Beach harbor (now required to use electric shore power), lawn mowers, even charcoal grills. Some of it sounds silly – the EPA can regulate your Fourth of July barbecue? – but in fact things like charcoal lighter fluid and old leaf blowers and lawn mowers make up a significant fraction of air pollution.

What’s happening here is California flexing its muscles and deciding that while the air is cleaner, it’s not clean enough. The EPA allows other states to choose to follow California’s rules or the EPA rules, but they can’t set something in between. Those states following CARB rules for auto emissions are clustered mainly in the Northeast and Pacific coast. They include Arizona, Connecticut, District of Columbia, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington state.

Tesla is worried that CARB might cap how many emissions credits any one company could sell. If that happened, Tesla would take a hit to its bottom line.

It’s also possible CARB might rejigger its rules to give more credit to plug-in hybrids as their range jumps from 15-25 miles to 50-plus moles. The new Chevrolet Volt is rated to run 53 miles on electricity (and in real world driving hits 60). It could be argued that if Volt drivers do half their driving on electricity, perhaps they deserve a half ZEV credit.

All in all, with news of recent Tesla Autopilot crashes, some production shortfalls as Tesla ramps up Model S and Model X production, and uncertainty over the plan to have Tesla buy out struggling SolarCity, it has been a mixed month for Tesla and founder Elon Musk. It can still point to the 373,000 reservations for the $35,000 Tesla Model 3, and advance from 2020 to 2018 its plans to ramp production to a half-million cars a year.